The inventor of the 401(k) says he created a ‘monster’

Most religious men find the answers to their prayers in scripture. Ted Benna found them in the U.S. tax code.

Fed up with clients only interested in getting the maximum tax break for themselves while doing as little as possible for their employees, he began to feel he could either remain a workplace benefits consultant or a Christian, but not both. In fact, just weeks before his life’s eureka moment came in September 1980, he thought about leaving the Johnson Companies, his suburban Philadelphia firm, to take a job at a local Christian college.

Instead of quitting, Benna, 74, helped turn a little-noticed new subsection of the tax code into the least likely of household names: the 401(k).

www.401kbenna.com

American workers now take for granted they can sock away pretax earnings (with a company match), but at the time many couldn’t imagine Benna’s idea, slapped together like regulatory papier-mâché, would hold up under IRS scrutiny, let alone replace pensions as the bedrock of American retirement.

“I had only one thought at the time,” Benna told MarketWatch. “How could I make this sucker fly?”

He had help. His boss, Edwin Johnson called in a chit from a friend in the Reagan administration, who arranged a meeting with “the right people at the IRS,” said John Wright, then an employee at the firm and now its president. “We sensed that if Ted’s idea was legitimate it could be something big — just not how big,” he said.

Though Benna wasn’t the only one to see potential in section 401(k), there were far more naysayers at the time. Even with preliminary approval from the IRS (full regulations weren’t written for another decade), “many of the big consulting firms still came out and said it was all a scam,” Wright said. In fact, the original purpose of section 401(k) was to limit the use of executive cash-deferred plans.

The 401(k)’s big regulatory hurdle, and perhaps its big marketing hurdle, was that administrators technically needed the IRS’s blessing to reduce employee wages in order to put money into the tax-deferred accounts. They were originally (and ominously) dubbed “salary-reduction plans.”

“If the boss suggests you take a pay cut, don’t panic,” began a 1982 Wall Street Journal article.

The Johnson Cos. administered 50 401(k)s in 1982, mostly to its own employees. Today Americans have some 50 million plans holding roughly $3 trillion in assets. Benna’s firm earned its money on the record keeping for the plans (with the help of a $65,000 Wang computer), but outsourced the actual investing component to the Vanguard Group, back when the future mutual-fund giant was still in its nascent days.

“Ted was the moral standard within the company and thought it was a conflict for us to also handle the investments,” Wright said. “He believed in doing the right thing.”

But like many critics, in recent years he began to think 401(k)s might not be the right thing. He’d created “a monster” that should be “blown up,” Benna lamented in 2011.

Employee Benefit Research Institute.

The plans had grown so overcomplicated and so fraught with hidden fees and opportunities for bad decisions that they were better at enriching the financial industry than the actual savers — precisely the abuses that nearly drove him out of the business and to the Christian college back in 1980, he said.

He never lost faith, however. President George W. Bush hailed 401(k)s as a pillar of the “Ownership Society,” a way to give Americans “personal responsibility” for their future. But while Benna enjoys his semiretirement on his Jersey Shore, Pa., farm, thanks to his 401(k) and that of many others, he continues to argue that employers, the financial industry, and the government also owed a responsibility to savers.

“For all its issues, the 401(k)’s biggest value is that it turns spenders into savers,” he said. “Not that I spend much time basking the glory of the 401(k). What matters most to me now is spending time with my grandchildren and my horses.”

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